LONDON, Sept 13 (Reuters) - Britain's economy is picking upat last but the country has a problem it didn't face afterprevious recessions and which even now remains hard to detect:the corporate undead.

Thousands of companies have subsisted through the downturnthanks largely to accommodating bankers and very low interestrates. As the economy gathers pace, some will recover andflourish, but the weakest of these "zombie firms" will find thatcompetition and a shortage of cash spells the end.

More than a million people are employed by businessesshowing signs of acute distress, according to the Association ofBusiness Recovery Professionals, R3.

If recovery does kill off the weakest, that may meanunemployment gets worse before it gets better, which in turn maybe a cue for the Bank of England to keep interest rates lowerfor longer, casting its forward guidance in a new light.

"A growth in activity means a growth in competition - demandfor working capital - and those that can't keep pace potentiallyfall behind or over-extend themselves," said Lee Manning, apartner at accountants Deloitte.

The "zombie" phenomenon emerged in the 1980s and 1990s whenU.S. savings and loan associations and Japanese banks staggeredon thanks to cheap money.

In the UK now, "zombie" firms are commonly defined asloss-makers which, helped by low borrowing costs, can onlyservice their debts. Cash is so tight, even a slow month in theholiday season can finish them off. Where past "zombies" havebeen mainly in financial sectors, experts say Britain's arewidely spread, including service companies, manufacturers,builders and retailers squeezed by recession and onlineshopping.

To prove this, insolvency experts refer to company failures.These jumped in the months after the financial crisis began,then fell sharply in 2009 as the BoE kept shaving rates.

Now as demand is picking up, so are insolvencies: In thesecond quarter they ran at about 4,000 a month, says Britain'sInsolvency Service. That was still behind their average rate in2009-12 but higher than in the first quarter of 2013.

"I'm sure in some cases we have kept companies alive for toolong," a senior executive at a leading UK bank told Reuters."You've got to be mindful that we saw it as nursing companiesback to financial health and getting a better bank as a result."

'ZOMBIE' LIABILITIES AT 1 PERCENT OF GDP?

So how many 'undead' businesses are there?

R3's estimates are based on surveys of business owners. Itsays the "zombie count" - firms able to pay only the interest ontheir debt - has declined to just over 100,000 from a peakaround 160,000 in November 2012.

But it says more than 200,000 UK companies - nearly 8percent of the total - are in acute distress, either negotiatingwith creditors or struggling to pay due debts.

R3 estimates that at least 497,000 people are employed by"zombie businesses", and 1.3 million by acutely distressed ones.That adds up to about 4.4 percent of the British workforce.

"Businesses with such serious cashflow problems may findthat the day of reckoning is not too far off," wrote R3president Liz Bingham in a June report.

Another assessment, from corporate watchdog Company Watch,quantifies the risky debts on companies' balance sheets.

At Reuters' request, the group analysed the accounts of allcompanies registered in Britain and identified more than 227,000 that are in negative equity - a technical measure ofinsolvency which is the business equivalent of homeowners whosemortgage debt is bigger than the value of their property.

Company Watch found these companies in the UK have acombined negative worth of just under 70 billion pounds ($110billion). Business services, construction and media are theareas with the heaviest liabilities, according to the analysis.

Many of the firms will have shareholders who are ready tosupport them, but Company Watch economic models predict that,over the next three years, around a quarter will be unable torepay their debt. That is equivalent to a liability of 17billion pounds, equal to about 1 percent of annual GDP.

"The risk is that there will be a flood of ... corporatefailures which could escalate insolvency numbers dramatically,"said Nick Hood, head of external affairs at Company Watch.

Recovery is risky for cash-poor firms because orders rise,suppliers put up prices and rivals cut theirs to win marketshare. Companies whose cash is already absorbed by interestpayments have little room for manoeuvre to fulfil extra orders.